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PayPal Merchant Services Case Solution

Solution Id Length Case Author Case Publisher
877 1282 Words (4 Pages) Thomas R. Eisenmann, Lauren Barley Harvard Business School : 806188
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PayPal’s early success is attributed much more its own strategic decisions rather than decisions of competitors. PayPal’s early success is attributed to its superior product offering which enhanced ease to the consumers. One important advantage of PayPal was that PayPal payments were credited in real time to the payee which avoided the usual bank processing time of a referral. Also, the rise of PayPal was very much related to the growth of eBay. eBay purchases could be made very quickly through PayPal which shortened the delivery time since the seller was able to send the goods promptly only after receiving email notification from PayPal.

Following questions are answered in this case study solution:

  1. What explains PayPal’s early success? Discuss the role of PayPal’s strategy in its success, as well as the role of decisions by actual and potential competitors.

  2. How vulnerable are Visa and MasterCard to share erosion in e-commerce payments due to PayPal’s off-eBay expansion? What, if anything, should the card associations and their members do about PayPal’s off-eBay initiative?

  3. What strategy should PayPal pursue for Merchant Services? How should PayPal allocate investments between efforts to grow the merchant side and the consumer side of its platform?

  4. Does Google Checkout represent a serious threat to PayPal? What, if anything, should eBay/PayPal do to defend themselves against Google?

PayPal Merchant Services Case Analysis

PayPal was also considered secure among users, since verification of the data was carried out after the members had registered their personal data and account information. Also, PayPal offered that its members can money to any e-mail address in the supported countries. Confirmation of user account included the procedure for transfer of small amounts of money from the card user with the code, which confirmed the identity of the cardholder with access to payment history, identity, deceptive password and other data into the system of PayPal. Credibility of PayPal was also high since it was licensed in US as a financial services company and the company adhered with many of the rules of financial management of banks.

Another key strategic decision of PayPal’s management which played an important role in its early growth was the decision to make PayPal system free of charge. Registration with PayPal free of charge and only a commission was charged with the payee when a transaction was done. Of course, one reason for PayPal’s rapid early success was the first mover advantage. PayPal allowed customers to transfer funds and receive direct cash transfers using 24 different types of currencies, which was a leading innovation at the time. Therefore, PayPal’s early success is explained by a combination of favorable external environment along with some key strategic decisions by the organization.

How vulnerable are Visa and MasterCard to share erosion in e-commerce payments due to PayPal’s off-eBay expansion? What, if anything, should the card associations and their members do about PayPal’s off-eBay initiative?

Visa and MasterCard are significantly vulnerable to PayPal’s expansion outside eBay because PayPal is considered to be much more ubiquitous and user friendly than the former two payment systems. PayPal has closely followed technological developments and has made it service offering highly consumer friendly. A technology called "PayPal Here" also facilitates payments for Smartphone users: This is similar to the supermarket checkout, credit card drawn on a short essay, which is connected to the headphone jack of the device. Checks can also be captured via the built-in phone camera. For instance, PayPal can be used readily through a Web-enabled mobile phone. Support for Web-enabled pagers and other handheld devices depended on the authenticity of the assignment to PayPal members maintaining a delicate balance between security and ease. Visa and MasterCard lags behind PayPal in such forms of product innovations. Also, Visa and MasterCards are only restricted to those users who possess a certain level of creditworthiness to be issued a credit card by the bank. On the other hand, PayPal only requires an email address and a bank account.

PayPal can be utilized to transfer funds from a bank account to another bank account given that the recipient of the funds is registered with PayPal with his bank account details. This service is free if the user chooses his personal or business bank account as an origin of funds, or if there are funds present in user’s PayPal account. PayPal also has an advantage over Visa and MasterCard since customers can pay with their PayPal account on sites that accept Visa and MasterCard. PayPal can also be used to accept card payments; however, the converse cannot occur.

MasterCard and Visa can adopt a number of strategies to counter the growing threat from PayPal. They can either position their service on a higher ladder on brand positioning in comparison to PayPal or associate themselves with a premium service offering. Or credit card companies can decrease the percentage charged during the payment process to encourage merchants to prefer their service over PayPal. Merchants would be willing to prefer MasterCard and Visa over other payment systems, if they can save even a marginal percentage on transaction costs.

What strategy should PayPal pursue for Merchant Services? How should PayPal allocate investments between efforts to grow the merchant side and the consumer side of its platform?

Merchant services business is a highly important segment of PayPal’s business since the company attained a high proportion of its revenue from fees earned from merchant accounts. One possible strategy for PayPal should be to create segmentation within merchant side of the business and instead of levying fixed charges of $0.30 per transaction; it should create slabs within merchant account with respect to the monthly volume of transactions. The net outcome of this strategy will be that PayPal will be able to counter growing competition from credit card companies related to the acquisition of merchant accounts. Research has also shown that credit card companies are strongest among large retailers, as compared to small sellers. It is also realized that large online retailers account for a very huge volume of online business. Therefore, PayPal should create specific offering for very large businesses and implement key account management teams within its organizational structure.

In terms of allocation of investment between merchant side of the business and consumer end of the business, PayPal should allocate major proportion of investment to merchant side, since this is the segment responsible for generating the majority of revenues for the company.       

Does Google Checkout represent a serious threat to PayPal? What, if anything, should eBay/PayPal do to defend themselves against Google?

Google Checkout does represent a serious threat to PayPal because Google is a highly respected brand name round the globe and Google’s products already engage users in a highly integrated manner. Since, consumers are already comfortable with Google as a part of their everyday life; they are likely to find Google’s Payment system as much more convenient than PayPal. Interestingly, Google has adopted a majority of PayPal’s practices which include commissions and charges. One advantage of Google’s payment system for the merchants is that they can attain a higher click-through rate on their sites, if they choose Google Checkout as the payment option. The monopoly of Google over search engine market can be utilized effectively to gain a competitive edge over PayPal. Also, customer service of Google Check out for fraud settlement has been termed as excellent by a majority of merchants and consumers.

One key strategic move which can lead PayPal to gain a competitive advantage over Google is to aim for regional and psychographic customization of its product offering. Consumers in different parts of the world have a unique set of preferences and wants. Marketing research can be carried out in different regions to unlock customer needs according to different regions and service offering should be customized for different regions. This strategy can create a closer fit between customer preferences and service offering.

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